ABSTRACT

The purpose of this research is to examine the impact of credit management on commercial banks. The introduction of the prudential guideline in banking industry, the volume and value of loans and advances classified into non-performing account ahs continued to increase in bank lending. Obviously this has adverse effect on banks since it affects their cash flow and impair profitability.
Most loans and advances go bad because of the inadequacy in credit management and recovery procedure of banks. Appraisal of lending vis a vis the credit management of banks and the impact of the application of prudential guidelines on credit, form the major objective of this study. Union bank of Nigeria Plc Okpara Avenue Enugu was used as a case study with a view to highlight the effectiveness, the adequacy or otherwise of the credit management policy of Nigerian commercial banks with a view to finding the causes and consequences of non-performing loans and advances. The causes are excessive lending on security values and bad management of borrowers. Having analysed the data, the following findings were made, the principal objective of bank lending is to generate revenue, the loan deposit ratio affects the liquidity position of commercial banks, non- performing account kept on increasing the frequent occurrence of non- performing accounts was discovered to be as result of the banks inability to put in place an effective process of loan recovery, implementation of prudential guidelines by Nigerian commercial banks reflect the real income of banks. In conclusion, the prudential guidelines reduced the profitability of commercial banks and made banks classify their loans clearly. In the recommendation, the researcher suggested that the provisions of the prudential guidelines should be adhered to and an effective loan monitoring unit should be set-up in al commercial banks.

CHAPTER ONE

1.0 INTRODUCTION
1.1 BAKGROUND OF STUDY 
Banking is essentially an international business especially now that domestic financial markets in many countries are being internationalized. In modern economy there is a distinction between the surplus and economic units and the deficit economic units. Consequently, there is a separation of savings and investment mechanism. This has necessitated the existence of financial institutions whose job includes the transfer of funds from savers to investors. One of such institutions is the commercial banks.
The intermediating roles of commercial banks places them in a position of ‘Trustees’ of the savings of surplus economic development. The techniques employed by bankers in this intermediating functions should provide them perfect knowledge of the out-come of a lending such that funds will be allocated to investors in which the probability of full repayment is unity.
However, in practice, the reverse has always been the case. Almost all lending decisions are made under condition of uncertainty, the risk and uncertainty associated with lending decision situation are so great that the concepts of risk and risk analysis need to e employed by lending bankers in order to facilitate sound decision making and judgement. 
This implies that all risks should be objectively assessed. Unfortunately, many commercial banks have based their lending decision on subjective principles. In most cased emphasis is placed more on security offered for the loan rather than paying attention to the proper monitoring of the loans and the insisten that recovery potential of credit should be from the projected cash flow.
This has led to the increasing cases of non-performing advances.
The structural adjustment programme (SAP) introduced in 1980 had led the adoption of a wide range of economic liberalization and de-regulation measures which in turn had resulted in the emergence of more banks and other financial intermediaries.
Consequently, it became imparable to strengthen and extend the powers of the central Bank of Nigeria to cover these new institutions in order to enhance effectiveness of monetary policy and the regulation and supervision of banks and non-banks financial institutions.
Perhaps, it is necessary to point out the deregulation, which does not mean the absence of regulations. Banking industry is generally considered to be more regulated than any other sector of the economy. This is largely due to the crucial intermediation played by the operations in the industry. The various deregulation measures brought about benefits, opportunities and problems. The industry is now more competitive and this has to a large extent increased concern about abuses and violation within the industry.
It is in the light of the foregoing that the need for prudential guidelines and the recent review of the banking decree should be seen.
The prudential guidelines was issued by the banking supervision department (BSD) of the Central Bank of Nigeria (CBN) on 7th November 1990 through circular letter No BSD/90/28/vol.1/11 to all licensed banks and their auditors. It is aimed at ensuring a stable, safe and sound banking system. It is meant to serve as a guide to bank as follows.

a. Ensure a more prudent approach in their credit portfolio classification, provisioning for non-performing facilities, credit portfolio disclosure and interest accrued on non-performing assets.
b. Ensure uniformity of their approach in (a) above
c. Ensure the reliability of published accounting information and operating results.
Until recently, users of financial statement of licensed banks have had cause to express concern over the quality of such statements in view of the varied and in most cases inconsistent practices adopted by banks. Specifically a number of persons felt concerned that banks earnings were being overstated as interest was being taken on non performing assets. Also comparisons of banks performances became difficult.
The prudential guidelines were therefore issued to protect the interest of depositors thereby promoting public confidence in the banking system.
On the other hand, the increasing trend of provisions for non- performing credits in most commercial banks is a major source of concern not only to management but also to the shareholders who are becoming more aware of the dangers posed by these non- performing credits facilities. These destroy part of the earnings assets of the bank such as loan and advances, which are classified as the main sources of earnings, and also determines the liquidity and solvency of banks. In other words, non-performing credits generate two major problems i.e, non-profitability and liquidity problems. A commercial bank like any other business enterprise has to earn sufficient income to meet its operating costs and to have adequate returns on its investment.
Having regard to these problems a prudent banker should be cautions to lend and manage loan and advances effectively and efficiently with a view to minimise the problems caused by classified credits.
In this study we shall survey the possibility of reducing the occurrence of non-performing credits through improved standard of lending and effective controls. For the purpose of the commercial banks being mostly affected, we shall appraise the lending procedure and credit management of union bank of Nigeria Plc and assess the effectiveness or otherwise of the existing credit management policy of the bank. We shall suggest on how to improve any inadequacy highlighted by out findings. C.B.N guideline (1990).

1.2 STATEMENT OF THE PROBLEM
Since the introduction of the prudential guidelines in banking industry, the volume and value of loans advances classified into non-performing account has continued to increase. The increase has remained even at faster rate than the increase in bank lending.
Obviously, this has adverse affected on banks since it affects their cash flow and impairs profitability. It is believed that most loans and advances go bad because of the inadequacy in credit management and recovery procedure of banks.

1.3 PURPOSE OF THE STUDY
The main purpose of this study is to examine the appraisal of lending vis-a-viz the credit management of bank.

1.4 SCOPE OF THE STUDY
The scope of this study covers only the appraisal of the Nigerian commercial banks credit management. Because, it is difficult for the researcher to cover all the banks in the study, the study is therefore restricted to Union Bank Okpara Avenue Enugu.

1.5 SIGNIFICANCE OF STUDY
This study indicates that whenever a credit is granted that there is need to urgently appreciate the point when such credits begins to look doubtful. This will enable the bank to at least obtain full repayment including accrued interest at worst to reduce the eventual occurrence of capital loss. Since provisions for non-performing credits are changes against profit, it is appropriate that we review the methods proportions and margins of lending to non-performing facilities. Hence the significance of this study to bankers, besides bankers will be able to appreciate an effective appraisal of their lending and control mechanism, especially now that they are expected to lend under tight monetary conditions. The economy as a whole will benefit from the study because if the level of non-performing advances is reduced banks will be left with more profits to enable them make the expected contribution to the development of the economy.

1.6 HYPOTHESIS
Ho1: The principal objective of bank lending is not to generate revenue.
Hi1: The principal objective of bank lending is to generate revenue.
Ho2: The loan deposit ratio does not affect the liquidity position of a commercial bank.
Hi2: The loan-deposit ratio affects the liquidity position of a commercial bank.
Ho3: Classified debts have an relationship with the security obtained for the loan granted.
Hi3: Classified debt have relationship with the security obtained for the loan granted.
Ho4: Non-performing credit do not depend on loan recovery processes.
Hi4: Non performing credit depends on loan recovery processes.

1.7 DEFINITION OF TERMS
Profitability: A tendency for the bank to have excess of revenue over expenditure resulting in profits.
Liquidity: This refers to the ability of the bank to meet its financial obligations to the customer, or it can mean the case with which banks can raise funds to meet with depends demands.
Loan-Deposit Ratio: This refers to the amount 
Bank “Run”: A situation where the banking public withdraws their deposits in large numbers from a bank feared to be going distress.
NDIC: Nigerian Deposit insurance Company: An institution established to provide insurance services for bank deposits.
Performing Credits:- A credit facility is deemed to be performing if payments of both principal and interests are up to date in accordance with the agreed term.
Non-Performing Credits:- A credit facility should be deemed as non-performing when any of the following conditions exists.
i. Interest or principal is due are unpaid for 90 days or more.
ii. Interest payments equal to 90 days interest or more have been capitalized, rescheduled or rolled over into a new loan.
Standard advances
Non performing credit/ advances are classified into substandard, doubtful and lost credits. Substandard advances are the ones whose principal and or interest remain outstanding for more than 90 days but less than 180 days.
Doubtful Advances:- The principal or interests remain outstanding for at least 180 days but less then 360 days.
Lost Advances:- Lost advances are the ones whose principal and or interest remain outstanding for 350 days or more CBN prudential guideline (1990).